Why Gillard can’t prevent gold-plating energy infrastructure

Julia Gillard has launched a media offensive on power prices, but her proposals — largely plagiarised — fall well short of her claim of banishing “gold plating”. Useful reform appears some way off.

Readers of the Sunday newspapers were greeted with headlines that Prime Minister Julia Gillard had a plan to fix the gold-plating that has been taking place in electricity networks. Apparently her plan will save electricity consumers $250 per annum.

Sorry to spoil the party, but it won’t rid us of gold-plating, and in fact it’s not even her plan; it’s pretty much been plagiarised from the Australian Energy Market Commission.

Gillard’s announcement over the weekend involves the following core elements, which will require the consent of the states to be implemented:

Establish a bidding mechanism where large energy consumers could offer to reduce their electricity demand in competition against dispatching additional power generation

An increase in funding for the Australian Energy Regulator

Setting of reliability standards for the electricity network to be done at a national level rather than by individual states, as occurs presently

Widespread roll-out of time of use pricing in conjunction with interval metering and retail price deregulation

Establishment of a consumer representative panel that can challenge network expenditure proposals

Preventing networks from being able to automatically recover costs of spending beyond that approved by the regulator in a subsequent regulatory period.

The problem with the time-of-use pricing proposal is that while the AEMC has decided on a mandatory implementation for what it terms “large” residential and small business energy consumers, it leaves it up to the states to decide what “large” should be.

State governments, with the exception of Victoria, have been incredibly timid in rolling out time of use pricing to date. And even Victoria back-tracked. So leaving it to the states to define “large” consumers is a recipe for inaction. Also, the AEMC’s guidance on what is a large consumer suggests it might be consumers with electric cars! If that’s the case we’ll be waiting a very long time before the roll-out of time-of-use pricing becomes widespread.

And one shouldn’t put too much faith in time-of-use pricing and smart meters — large business energy consumers already have such structures in place and don’t noticeably alter their electricity demand during peak periods.

The funding increase for the regulator will probably help, but critics of the regulatory process, such as former head of the Energy Users Association Roman Domanski, suggest the regulator’s problem wasn’t resources. Instead they argue it was a lack of courage to use the powers they already had, in an effort to keep state governments onside as they transferred regulatory powers to the AER.

The devil is in the detail around consumers being able to challenge network expenditure proposals. That’s because we already have a consumer advocacy panel and an industry group representing large energy users who critique and provide input to energy regulatory processes.

The naming and shaming proposal is just odd. Provided the rules are changed so that network businesses are unable to automatically recover the costs of expenditure beyond that approved by the regulator, networks will be as upset about overspending as consumers.

Probably the biggest driver of gold-plating remains largely unaddressed by Gillard and also the AEMC: the ability for state governments to borrow money at very low rates, but then claim a rate of return reflective of the costs of a private sector borrower via their network businesses. This means state governments have a very strong incentive to overbuild networks, because it works like a form of shadow taxation.

While this carries political risks, with GST and other forms of state government taxation revenue drying-up, what other choices do they have? Plus the carbon tax and renewable energy support policies have been a very convenient cloak to fool consumers about the primary reasons for the increases in their bills.

In terms of getting state governments to sign on to these proposals, NSW is likely to be the biggest problem. Its government is in the process of trying to privatise its electricity network business, which is a good thing over the longer term. But in the short term, if Victoria’s history of privatisation is anything to go by, NSW will want a regulatory regime that inflates returns as much as possible to maximise the sale price.

The NSW government also wants to sell its generators. For the most part generators make pretty measly money, except for very short peaks in demand when prices can reach levels several hundred times the average price. Encouraging households and businesses to switch off and switch down appliances during peak periods is bad news for electricity generators.

The reaction of the NSW deputy premier to Gillard’s proposal just serves to illustrate this problem. Rather than just pointing out Gillard’s proposal is recycled material from the AEMC, which makes good sense, she roundly criticised it and tried to shift attention towards the cost of the carbon price and “green schemes” (some of which are NSW government policy) on consumer bills. But these have had a fraction of the impact caused by network inefficiencies.

As I said back in March — don’t hold your breath waiting for implementation of electricity market reform.